I don't think we should abandon the model because it provides some important insights regarding growth. But I agree with Boudreaux that it lacks detail that can lead us to miss important trends or jump to the wrong conclusions.

I'd be interested in your observations on the piece. Is it worthwhile to point out the shortcomings as well as the value of the data to the students?

It summarized much of the current debate and, in some circles dismay, about fighting global poverty. It would be a good piece to summarize that last section about economic development in your macro class, or it might make an interesting discussion piece to use during one of those pre-holiday class days coming up.

Friday, October 29, 2010

Here are a couple of resources to go along with the teaching of fiscal policy. First, today's post on Greg Mankiw's blog lifts a bit from Life, the new biography by Rolling Stone Keith Richards. It seems that the members of the group make/made a number of decisions based on the tax effects. Needless to say, this means that they have used resources avoiding taxes that would have been available to governments had the policies been better designed.

Of course, this shouldn’t be a surprise given that Mick was a student at the London School of Economics. I’m sure he learned early on that You Can't Always Get What You Want (scarcity is fundamental).

This next bit is a bit over the top. It's a dark and somewhat disturbing advertisement about the national debt from the 1980s...oh, and it was directed by Ridley Scott, the person who gave us Alien. (HT to Marginal Revolution.)

Tuesday, October 26, 2010

Thorstein Veblen's book The Theory of the Leisure Class introduced the term "conspicuous consumption". People use the purchase of high-priced items to signal their wealth, their "status" and a number of other things. Here is a cartoon you can use when introducing the concept.

I know many of you are Seinfeld fans. You've probably lost track of how many times you've seen certain episodes. But the fact that certain phrases have worked their way into our collective consciousness is a testament to its pervasive influence. Not bad for a show "about nothing."

Sunday, October 24, 2010

Some of you have already covered monopolies and protection of research and government intervention to improve social welfare. But some of you haven't. Regardless, here's a comic strip that can be used to kick-off those ideas.

And for those of you who like to discuss how positive data can be used to support normative statements (on either side of the aisle) here's a very useful and interesting video (HT to Greg Mankiw).

I think this can be used a number of ways. But the most important lesson I would offer your students is "what data isn't being shown (on either side) and why?" Too often we (teachers and students) get caught up in an idea and neglect some aspect of the data that may enlighten. And just as often we add data that muddies the water. As always, I welcome your observations.

Saturday, October 23, 2010

Earlier this week, The Wall Street Journal carried this story about a move by the Chinese central bank that sparked a sell-off in the market. The Chinese central bank had, unexpectedly, raised its short-term lending rate. Many saw this as a portent that the Chinese economy was being slowed and this would not be good for future growth as it would dampen Chinese demand for goods from around the world. This is a solid observation. But I want to raise two other points.

First, as long as the Chinese currency is tied to the U.S. dollar, or more accurately a basket of currencies that includes the U.S. dollar, the Chinese central bank is limited in its policy. Essentially, to maintain parity, it must match the policy of the countries to which it has tied its currency. This implies that as these other countries ease policy to fight recession, the booming Chinese economy is subject to a similar easing. This only invites inflation. Essentially, any nation that ties its currency to another's, must commit to a similar monetary policy. That's good if the business cycles are coincident. But when they diverge, it isn't a good idea.

Second, given the pressure on China to let the currency float, this might be a first step to do so. A higher interest rate will strengthen the currency which will help Chinese consumer buy imports and put a bit of a burden on Chinese exporters. It seems that is what many have been calling for. As a result, I'm surprised by the reaction.

As always, I welcome other insights. I do think this story is a great way to talk about monetary policy and its connection to exchange rates

As long as we’re talking about China, here’s another good item. When we talk about trade and the topic moves around to trade deficits, I think it's always a good idea to talk about how trade is measured. Mark Perry at Carpe Diem has a good post that discusses that very idea.

The example Mark uses is the iPod. It is counted as "made in China" and is counted as an import. The reality is the components come from many countries and the final assembly is done in China. Of the $150 price tag, only about $4 of value is directly attributable to China. Yet, since that's the last stop before it finally comes to the U.S. It's counted as an import from China. But it really is a simplification.

But, it was a profit motive that developed the technology. And it was also the idea that we best serve ourselves by serving others that led many firms in many nations to make the technology available. The idea was brought home, yet again over the weekend when this article appeared in my local newspaper, The Richmond Times-Dispatch.

It's just something to think about and discuss with your students. As always, I welcome your comments.

Wednesday, October 13, 2010

I've had several posts on trade lately, so I will continue in that vein.

Jeff Jacoby of The Boston Globe had a very good editorial last week about trade with China (HT to Cafe Hayek). As the title suggests, the enemy is not cheap goods. In fact, one of his phrases really struck home with me. He called Chinese manufactured goods one of the best "anti-poverty programs". I think this is an excellent image to use if you are explaining the real income model. Because dropping the cost of any one good in an individual market basket makes more resources available - increasing real income. You can also use opportunity cost and benefits of trade.

To go from global to local, Russ Roberts has a useful post on Cafe Hayek about "Buy Local." Roberts doesn't agree with the economic reasons some put forth for buying local. He uses an original line of thinking, in my opinion. When we teach specialization and division of labor, we explain the extent that it's possible is dependent upon the size of the market. Larger markets allow for more specialization and greater division of labor. These can, in turn, provide more opportunity for growth. Artificially restricting trade to a "local" market limits possibilities. The idea of relating growth to size of the market is not new. But you may not have used the "buy local" movement as an illustration. (I have to also mention that Roberts' comment "we tried buy local in the Middle Ages...it didn't work" is priceless.)

I recommend both of these as interesting ways to connect concepts and reinforce understanding.

One of Ed Dolan's posts last week discussed Congress's passage of the continuing resolution to fund government operations. In it, he references an interesting paper from the recent Kansas City Fed Jackson Hole conference, and a rare speech on fiscal policy by Fed Chairman Ben Bernanke.

At the end of the post, Ed also provides some useful slides to accompany the artiicles. You might want to give them a look. I think they could be helpful.

Creditloan.com has an interesting graphic (HT TO Chartporn) on how the average consumer spends their income. It's based on Department of Labor data. I would think it closely resembles the CPI market basket. Nevertheless, it's a good graphic to have around if you're teaching personal finance and could be used as an introduction to budgeting.

Sunday, October 10, 2010

Regular reader, Dr. Mark, sent a link to this video. I thank him most whole-heartedly.

It features the late Milton Friedman engaged in a debate with a young man identified as Michael Moore - yes, that Michael Moore. I haven't seen anything to confirm that part, but Dr. Friedman's explanation to the young man (whoever he was) is great. I'm sure this will stir things up in an economics class, or even an ethics class.

About a week ago, I posted on why economic educators are needed to help educate the young about the importance and value of trade. I mentioned that a recent poll showed just over half of Americans feel free trade is detrimental to the economy.

This past weekend, one of my favorite economics authors, Doug Irwin at Dartmouth had a long and informative piece in The Wall Street Journal. I like Irwin because he is an engaging writer on what many consider to be an esoteric topic. His arguments are clear and his examples are always well-chosen. If you're an economics teacher looking for a piece to have your students dissect when you discuss trade, or if you're an American History teacher looking for something that relates the long tariff debate in the U.S. to current events, you could look a long time before you found anything as pertinent as Dr. Irwin's piece.

Tuesday, October 5, 2010

For those of you teaching at the college level, the Federal Reserve Bank of St. Louis has this contest for students who are interested in making a video. There's prize money, and the video will be used to help high school students. I think it would be great if some of your students won.

I really enjoyed the first two. They provide clear explanation without shifting the supply and demand curves around. I found that makes it much easier for students to understand. I strongly recommend these to you if you need to brush up, or even to give to your AP students if they were absent the day of your stimulating presentation.

Monday, October 4, 2010

The answer lies in this article from today's edition of The Wall Street Journal. It seems that as high unemployment lingers in this period of slow growth, people are becoming increasingly skeptical about the benefits of trade. And the skepticism cuts across all job, income and party affiliation brackets.

People are increasingly unaware of or unconvinced about the benefits of trade. They appear to be more concerned about job security than the corresponding impact on prices. In fact, I am reminded of a line from the musical play 1776. At a critical point of the debate, John Dickinson, a delegate from Pennsylvania, is reminded by his fellow delegate, Ben Franklin, that those who would sacrifice freedom for a little security can end up losing both. In the play, Franklin speaks of political freedom. But the same can be said for economic freedom. By sacrificing the freedom to trade to gain job security, we may sacrifice the benefits of competition that come with trade, and face a reduced number of jobs in the long-run.

This brings me to a related opinion piece in today's Journal. In it, the author uses a doomsday clock analogy to argue for renewing the Bush tax cuts and moving forward on free trade. I'm not about to discuss the tax cuts in this post. But his discussion about trade agreements is relevant. He likens the increasing calls for protectionism in various guises to the Smoot-Hawley Tariff that was a contributing factor to the Great Depression.

The analogy is not quite perfect, but the result could be. By cutting trade, we stand not only to face higher consumer prices, but to put ourselves at a disadvantage as world markets pull out of the slowdown and kick into high gear. If the U.S. isolates itself from the growing world market, we shouldn't be surprised if potential customers shop elsewhere.

So this brings us back to the topic of today's post. As economic educators, we need to be sure that students understand all sides of the trade issue. There are not just costs of trade, but benefits from trade. And the benefits can have long-term implications. I'd welcome your thoughts.

Blog Archive Note

All entries prior to August 15, 2007 appeared on the economic education blog of the Federal Reserve Bank of Chicago. Entries between August 15, 2007 and July 31, 2009 were under the auspices of the Powell Center for Economic Literacy in Richmond, VA.